In This Update:

Q of the Month:
Can I Transfer Funds From My IRA?
Key Focus:
Inherited IRAs are NOT Tax-Free Inheritances
Ruling to Remember:
An IRA Rollover Error

Resources

Expert
Professional
Assistance

?? Question of the Month: Can I Transfer Funds From My IRA?

Q: IRA transfers seem easy, but I am sure there are pitfalls I’m not anticipating. I want to transfer money from my IRA to my husband’s Roth IRA. I am 35, and he is 36. Is this possible?

A: No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you most certainly cannot transfer your IRA into your husband’s Roth IRA.

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The Health Care Acts’ Effect on Future Tax Rates

The August issue of Ed Slott's IRA Advisor Newsletter details the recent Supreme Court decision that put taxes in the minds of many.

The Supreme Court ruled to uphold the 2010 Health Care Acts, a decision that brings some clarity to the laws’ effect on future tax rates.

This issue provides the details on the Health Care Acts’ tax consequences in 2013 and beyond and lays out several strategies you can use with clients to lower taxable income NOW before rates rise next year.

READ THE ENTIRE ADVISOR’S GUIDE IN AUGUST’S ISSUE OF ED SLOTT’S IRA ADVISOR NEWSLETTER

Inside Ed Slott's IRA Advisor Newsletter

The 3.8% Investment Tax is Here to Stay

Prescribing Relief from the Coming Health Care Taxes
Who is Affected by the 3.8% Surtax?
How IRA Distributions Impact the 3.8% Surtax
Reducing MAGI Through Increased Retirement Account Contributions
Trusts and Estates Get Hit Hard by the Surtax
Itemized Deductions Won’t Reduce MAGI
Using Gifts to Minimize Exposure to the Surtax
Planning with Non-Qualified Deferred Annuities to Avoid the Surtax
Looming Changes to the Medical Expense Exception to the 10% Penalty
A Premium on Tax Planning
Advisor Action Plan

2013 Health Care Tax Chart

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August Key Focus

Inherited IRAs Are NOT Tax-Free Inheritances

In a recent case, a non-spouse beneficiary learned that an inherited IRA is taxable and is not treated as a tax-free “inheritance.” He received a total distribution from his deceased mom’s IRA and thought that the IRA was an inheritance and not taxable. Accordingly, he never even filed a tax return to show the withdrawal. He was wrong on both points and had to pay the back taxes plus IRS penalties for not filing his return.

Distributions from inherited IRAs are taxed as ordinary income when the beneficiary receives a withdrawal. If the withdrawals happen gradually over a period of years, such as when only required distributions are taken each year, then taxes are owed gradually. However, if the beneficiary receives a lump-sum distribution, then the withdrawal would be taxed all at once. Beneficiaries can NEVER do a 60-day rollover of a distribution that is payable to them. If they want to move the funds to another custodian or investment, the funds can only be moved as a direct transfer.

The IRS considers distributions from inherited IRAs to be death distributions that are taxable, but not subject to an early distribution penalty. The 10% early distribution penalty does not apply regardless of the IRA owner’s age when he died or the beneficiary’s age when the withdrawal is received. Distributions from inherited Roth IRAs are tax-free if the account was held for at least five years including the time the Roth IRA owner had it.

Consulting with an expert in this area could save you from making what we call a fatal error – a mistake that cannot be corrected.

Ruling to Remember

Private Letter Ruling 201227010

A 70-year-old taxpayer we will call “Joanne” decided to change her investments in her IRA. Her financial advisor presented her with a loan investment opportunity. Joanne decided to take advantage of the opportunity and moved a sum of money out of her IRA so it could go into a self-directed IRA at a different financial institution.

That was the plan. It didn’t work out that way. Instead of depositing the money into the new self-directed IRA and then investing in the loan investment, the financial advisor and a representative of the loan investment company (Fund Company) deposited the distributed assets directly into a non-IRA account for the loan investment company.

The financial advisor and representative of the Fund Company then used the deposited funds to purchase investment notes directly from the Fund Company account. However, the self-directed IRA custodian would not accept the investment notes as they were not purchased with funds already within the IRA.

By the time the financial advisor realized his error, the 60-day rollover window had ended. Joanne arranged to deposit the funds into a self-directed IRA account after the 60 days were up and immediately filed a private letter ruling request that included a written admittance of fault from her financial advisor.

IRS waived the 60-day rollover requirement and considers the contribution a valid rollover contribution.

LESSON TO LEARN:
Make sure to follow this standard rule: the same property that is received from an IRA account MUST be rolled over to a new IRA within 60 days. In this case, the IRA owner received cash, turned it over to her financial advisor who bought the new investment, and then tried to deposit the investment into a new IRA. That doesn’t work. The cash must be rolled over to a new IRA to avoid taxes and penalties.